What Is the Concept of “Haircut” in Collateral Valuation?

A haircut is a discount applied to the market value of an asset when it is used as collateral. It reflects the perceived risk and volatility of the asset.

For example, if an asset is worth $100 and has a 20% haircut, it is valued at only $80 as collateral. This is a risk management tool used by exchanges and clearing houses to protect against potential future price drops.